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June 26, 2006

Inside Milberg's Credenza

By Walter Olson

(Reprinted from The Wall Street Journal, 6-22-06)

As the nation's premier filer of class action lawsuits, Milberg Weiss Bershad & Schulman LLP has long presented itself as a fearless watchdog of America's financial markets. Milberg lawyers are famed for their skill at seizing on missteps by the businesspeople they sue—a missed earnings projection, an omitted disclosure, a too-rosy accounting practice—and portraying them as evidence not of inadvertent or technical slip-ups, but of systematic and brazen crookedness.

All the while, if one is to credit the 102-page indictment by a federal grand jury in Los Angeles last week, Milberg Weiss was passing at least $11 million in payoffs under the table to plaintiffs in its suits. Since such payoffs are baldly illegal, prosecutors claim the firm took elaborate steps to keep them concealed from judges and others. They say Milberg funneled much of the money through law-firm cut-outs and other channels, including casinos, and drew on a stash of money kept in a safe located in a credenza in partner David Bershad's New York office, "to which access was strictly limited." Again and again, prosecutors add, the firm submitted sworn statements on behalf of its clients denying any receipt of the sorts of payments they were in fact receiving. The payoffs helped Milberg reap some $216 million in attorneys' fees from the cases prosecutors say they know about; others remain under investigation.

Milberg and partners David Bershad and Steven Schulman (who have taken leaves of absence from the firm) flatly deny the charges and say they're victims of overzealous prosecution. There's irony in this—since the firm is known for zealous tactics akin to those it's now facing, such as the use of charges under the RICO (Racketeer Influenced and Corrupt Organizations) law. Even so, some of the firm's complaints will resonate with critics of today's trend toward criminalizing business practice. The firm's defense Web site,, goes so far as to link approvingly to editorials in this newspaper.

* * *

When is a cash payment to someone an improper "kickback" or "payola"? Sometimes it is hard to discern the line. If you're a record producer who pays radio execs to spin a Jennifer Lopez disc, Eliot Spitzer will land on you with full force. But if you're a publisher who pays book chains to give prime display to your new hardcover thriller, you're safe. Economists and legal analysts typically consult a range of factors, including whether the person taking the payment owes some third party a duty of loyalty or independent judgment, whether an agent discloses his acceptance of a payment to his principal, whether a type of payment is accepted as customary in a given trade, and so forth.

Milberg Weiss lawyers have been in the forefront of efforts to define kickbacks broadly and punish them with rigor. The firm's Web site boasts that it "has sued major providers of private mortgage insurance for kickback violations, resulting in substantial settlements." Melvyn Weiss and others at the firm have expressed indignation at, and filed lawsuits over, alleged kickbacks in the contexts of Wall Street initial public offerings, mutual fund sales, insurance brokerage commissions and doctors' prescribing of pharmaceuticals.

Although there are many debatable cases, concealed payoffs to named plaintiffs in class actions aren't one of them: They're clearly improper under virtually any analysis. As the indictment states, both plaintiffs and their lawyers are under obligation 1) not to place a named plaintiff's interests above those of absent class members; 2) not to behave deceitfully or unethically toward the court or absent class members; and 3) not to withhold from the court "any fact" that might call into question the representativeness of the plaintiff (a financial dependence on the lawyer would be one such fact). As a class action proceeds, plaintiffs repeatedly swear under oath to these matters. Bonus payments to compensate named plaintiffs for their time and trouble are permitted at settlement, but they must be disclosed to absent class members and approved by the judge.
These rules have a purpose. With other class members absent, named plaintiffs are one of the few watchdogs against self-dealing or misconduct by the lawyers—specifically, the pursuit of settlements that result in high legal fees, whether or not they serve the interest of the class. It's true that law firms do seek docile, loyal or merely clueless persons to serve as their named plaintiffs, which means it's rare (though not unheard of) for them to contribute an independent point of view in a case. But if the Justice Department's allegations are correct, Milberg was taking no chances on the watchdogs staying pacified: It threw regular chunks of raw liver into their cages. Significantly, Justice alleges that payoffs were computed not as a share of the class's eventual recovery, but as a share of Milberg's own fee haul—incentivizing the named plaintiff to side with Milberg's interests should the two clash.

Every so often someone will suggest that since the named plaintiff operates as the lawyers' tool 99% of the time, why not dispense with the rigmarole and let law firms seek class action status without having to qualify any particular client as representative? But imagine for a moment a defendant's trying to argue that, because certain legal rules are economically inefficient, it should be okay to break those rules. Imagine what a skilled plaintiff's lawyer, like those at Milberg, would say in response to such an argument. Lawyers, of all professionals, are the last ones who should claim a privilege of ignoring the law.

A more likely source of sympathy for Milberg is its complaint—in common with that of many business defendants—of rough handling by prosecutors. To begin with, the Justice Department, following the line laid down by the now-infamous Thompson memorandum, insisted that Milberg waive attorney-client confidentiality if it wanted a favorable plea deal. The business community is in an uproar over the Thompson rules, with the U.S. Chamber of Commerce joining with groups like the ACLU and National Association of Criminal Defense Lawyers to challenge the waiver provisions as unfairly arm-twisting defendants into yielding up their employees' rights.

As a talking point for Milberg's defense, however, this one is likely to fade—precisely because the firm did hold out rather than cave. Nor is there an issue of favoritism, since the Justice Department subjects conventional businesses to the same unseemly pressure daily.

* * *

Should the feds have indicted the firm as distinct from individual partners? Memories are fresh of the indictment of Arthur Andersen, the accounting giant whose conviction was overturned by the Supreme Court three years later—far too late to save the firm, given the reluctance to let an indicted accountant do a company's books. Defending her Milberg decision, U.S. Attorney Debra Wong Yang cited the firm's lack of repentance: Not only had the "pattern of deception" gone on for decades, but "the conduct occurred all the way up to last year, when they knew we were looking at them."

The probe, in fact, had dragged on for six years, having met with implacable resistance from the Milberg side; prosecutors finally got their break this spring, in the person of businessman Howard Vogel, who, with his family members, had acted as plaintiff in about 40 suits. Mr. Vogel sang, admitting to more than $2.4 million in Milberg payments in a guilty plea, and others have reportedly begun to sing, too, which means further indictments are possible.

In short, the prolonged lack of interest in cooperating with law enforcement may cost the firm as dearly in the long run as the underlying offense. (Yes, now that you mention it, Milberg was the lead counsel in the suits against Martha Stewart.) The two celebrity lawyers who made Milberg famous, Melvyn Weiss and the now-departed William Lerach, have thus far escaped indictment: Of course, if they were prosecuting such a case, they would miss no opportunity to insinuate that misconduct by part of a team of top executives must have been at least tolerated by the others, that the rot goes straight to the top, that senior partners turned a convenient blind eye to signs of misconduct because they profited handsomely from that misconduct, and so forth. Messrs. Weiss and Lerach must count themselves lucky that such reasoning did not lead to their inclusion as defendants.

If they are consistent, those who cherish due process for white-collar defendants should spare some pangs for the many talented lawyers at the Milberg firm who, like Arthur Andersen accountants, may face professional shipwreck even though no one has charged them with the least bit of complicity in legal wrongdoing. And if they are consistent, those who applaud the crackdown on business misconduct of recent years should acknowledge that the Milberg prosecution embodies, for better or worse, many of the premises of that crackdown. Those are big "ifs."

June 12, 2006

Lawyer Lead-ership

James R. Copland

(Reprinted from City Journal, Spring 2006)

In its quest for profits, America's trial bar keeps finding new potential defendants, new theories of liability, and new ways to manipulate the political system. The lawyers' latest targets, paint manufacturers, find themselves under fire for lawfully making lead-based paint 30 to 50 years ago.

Concerns that such paint causes lead poisoning in children have led many states and localities to adopt "abatement" regulations, as any New York homeowner, landlord, or tenant well knows. The trial lawyers� new suits do not seek redress for injured children, however, but rather for the state, under the theory that lead paint generated a "public nuisance" and that the state needs money to clean it up in an estimated 240,000 contaminated homes. If this theory brings to mind the state-sponsored suits that led to the multibillion-dollar tobacco settlement, it should, because the tactics, and even some of the key players, are the same.

Last month, the lawyers hit pay dirt when a Rhode Island jury found three paint companies�Sherwin-Williams, NL Industries, and Millennium Holdings�liable to the state. Before getting to the seedy details, let's start with the scientific facts. Unlike tobacco, lead paint is a minor public health problem at worst. Yes, we now know that lead poisoning can impair children's neural development, though the level of risk is open to debate. Safety concerns resulted in the relegation of lead paint to outdoor use as early as the 1950s; by 1978, laws had banned it entirely.

Since the late 1970s, blood lead levels in children have fallen dramatically, owing partly to reduced lead-paint exposure, but mainly to the virtual elimination of lead in drinking water and automobile gasoline. Just how much safer are our kids today? Using the cautious threshold pushed these days by the Centers for Disease Control (ten micrograms per deciliter, much tougher than the 25-microgram level established for lead poisoning 15 years ago), the percentage of young children with elevated blood lead levels has fallen 98 percent. The most recent estimates from the National Health and Nutrition Examination Surveys show only 1.6 percent of children aged one to five above the CDC threshold, a far cry from the 77.8 percent who failed to meet the CDC's current standard in the late 1970s.
Such figures should be cause for celebration. But zealous public health advocates�often trial bar�funded�have continued to press for ever-lower lead exposure levels. In long-developed areas, such as northeastern cities, the presence of lead paint is substantially higher than in many parts of the country. But large local variations suggest a clear regulatory remedy. For instance, one study found that Providence, Rhode Island's children had three times the lead-poisoning level of those in nearby Worcester, Massachusetts. Unlike Rhode Island, Massachusetts requires that landlords abate lead paint in homes with children.

Rather than making low-income landlords clean up their act, however, Rhode Island chose to sue the companies that long ago legally manufactured lead paint. Notwithstanding the state's nominal position as plaintiff, it's important to realize that the trial bar itself is the driving force behind the lead-paint lawsuits, as it was when the states sued tobacco companies. Fittingly, the central player in the Rhode Island paint suit is the law firm of Ron Motley, one of the principal attorneys behind the tobacco suits. For its role in the Rhode Island lawsuit, Motley's crew stands to take home nearly 17 percent of any settlement.

How did Motley do it? Much in the same way that he and attorney Richard Scruggs scored the tobacco litigation: by co-opting political leaders. In the tobacco cases, Scruggs persuaded attorney general Mike Moore, his fellow Mississippian, to hire him and Motley to sue tobacco makers for smoking-related medical costs�after Scruggs contributed generously to Moore's campaign and flew him around for appearances in his private jet.

Motley has followed Scruggs's tobacco playbook to the letter. A South Carolinian, Motley began to take a keen interest in Rhode Island's notoriously corrupt politics. Opening an office in Providence, Motley's partner John McConnell became the state's Democratic Party�s treasurer. In the 2000 election cycle, their firm was the state�s largest political contributor, with over $500,000 for federal campaigns alone. Perhaps not so coincidentally, Rhode Island attorney general Sheldon Whitehouse appointed Motley's firm to be the state�s lawyers to sue paint manufacturers.

The resulting Rhode Island verdict makes a mockery of the basic principles of tort law. Typically, to win a lawsuit, there needs to be an injured party. Not here, where not a single injured party�or a single house constituting a "nuisance"�made it into the evidence. Typically, for liability, a plaintiff needs to show that the defendant caused its harm. Not here, where the judge instructed the jury that it could find the defendants guilty without even finding that any of the paint companies had manufactured any paint actually used in the state.

It's not yet clear how much the paint companies will have to pay Rhode Island. The good news is that the judge determined that the paint companies owe no punitive damages. Press reports and market reaction to the case have focused on that significant fact, not on the key finding of liability�which shows just how skewed the expectations for our legal system have become.

What's certain is that trial lawyers smell blood in the water, and other state attorneys general see an opportunity for cash. In addition to pending cases in New Jersey, Wisconsin, and Illinois, Massachusetts and Connecticut are now exploring paint suits, with the trial lawyers in the lead.

June 2006


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.